Contractors Roundtable

Roundtable Participants

Steve Deacon, President and CEO, S.D. Deacon Corp.

• Steve Deacon founded Portland-based S.D. Deacon Corp. in 1981. His leadership and business philosophy have guided the general contracting firm to a prominent position in the West Coast construction industry.

Robert Dyer, Manager of Retail Operations, The Lathrop Co.

• Robert Dyer is the overall retail and hospitality sector leader at the Lathrop Co. in Maumee, Ohio. He is responsible for executive-level leadership on retail and hospitality projects from the initial kick-off through project closeout. Dyer has more than 35 years of construction experience.

Carl J. Johnson, President, Near-Cal Corp.

• Carl J. Johnson has more than 28 years of progressive experience in the commercial and industrial construction field.

As president of Near-Cal Corp., a family-owned company, he visits each project weekly and is in charge of all estimating during the bid process of projects.

Kent A. Moon, President and CEO, Lakeview Construction, Inc.

• Kent Moon has been with Lakeview Construction since 1993 and is one of the company's original founders. He became President and CEO in 1999.

• Rob Oldach is a member of the American Institute of Constructors. CSI is a full-service general contractor building for national retailers and developers in the Western states, with offices in Colorado Springs, Portland, and Sacramento.

• Christopher L. Picone directs and manages the operations of the company. Since joining Capitol in 1999, he has focused on developing the organization's strategic short- and long-term goals and building a strong corporate infrastructure.

• Stephen J. Romeo Jr. has 17 years experience in the retail industry and has been with Scorpio Construction since the company began in 1989.

Barry Shames, CEO, Shames Construction

• As CEO of Shames Construction, Barry Shames handles responsibilities including financial management, marketing, technology, insurance, legal and human resources. The son of a builder, he has 30 years of experience in all aspects of the construction process.

Gus M. Vratsinas, Chairman & CEO, Vratsinas Construction Co.

• Gus Vratsinas is one of the three founders of Vratsinas Construction Co., which was launched in 1987. He has 29 years of management and professional engineering experience.

Dana Walters, National Marketing Director, FLYNN Construction

• Dana Walters joined FLYNN in 1997 to head its national marketing outreach. FLYNN Construction is a high-performance national contracting and construction management firm founded in 1989.

• Mike Willingham has more than 20 years of experience in retail construction. Prior to joining R.A.S. Builders in 1995, he served as director of construction for Montgomery Ward.

Retail contractors are grappling with the repercussions of a slowing economy. A lull after the retail building boom of the past few years was not entirely unexpected. But contractors are wondering how severe and how long this dip will last. A slumping economy has long-reaching implications on business activity and construction costs, as well as relationships with subcontractors and clients.

A more conservative pace of retail expansion has prompted some contractors to tighten their belts. Others are stepping up marketing or diversification efforts to weather the downturn. In this roundtable discussion, general contractors from across the country offer their insights on what lies ahead for the retail construction industry in the coming months.

SCW: What impact is the slowing economy having on retail construction?

Steve Deacon, S.D. Deacon Corp.: In terms of resources and pricing, the slowdown is having an effect. We get better sub-coverage on bids now than we have for the past seven or eight years. Whereas it had been difficult to find two or three subs to look at work, now it's not unusual to get eight to twelve, or even more, sub-bids in many trades. The result is that prices are beginning to fall, perhaps up to 10% in some categories of work.

The same thing is happening to the availability of both craftspeople and construction management staff. It had been very hard to find qualified people to hire, but now we get calls and resumes constantly. However, it's still true that the ‘top notch’ people are hard to find.

As far as types of retail work that have been affected, we are still seeing great activity from the grocery and discount retailers such as Safeway, Albertsons, Target, Walmart, etc. The developer work has slowed down quite a bit as the mid-sized and specialty retailers have become much more cautious with their expansion plans.

My crystal ball is a bit more smudged than others, but it appears that the retail market in Oregon should slowly recover in 2002 and by the end of the year be back to a more healthy pace of growth.

Dana Walters, Flynn Construction: As a general contractor we see no impact on retail construction as yet. The projects we are working on now were planned last year prior to the downturn. We expect the impact will be felt most later in 2002. Most retailers seem to be waiting out the storm, exercising a great deal of caution while planning and developing. It is expected fewer retail units will open as retailers cut the ‘borderline’ locations out of their plans and only open in the most ideal locations. There will probably more remodels of existing locations and fewer new units.

Kent Moon, Lakeview Construction Inc.: There will most likely be a cleansing period. The companies that have worked hard and are financially secure are those that have an advantage. Working even harder is paramount because a lot of companies that are not in good financial standing will be bidding work just to keep their doors open. Lakeview's goal is to solidify and improve its position in any type of market. Our conservative financial planning has also kept us prepared for any economic turndown. That is to say, cash has been put back into the company in preparation for difficult times.

Chris Picone, Capitol Construction Group Inc.: As expected, the faltering economy has caused a slowdown. As retailers make less sales and bring in less profits, they scale back their expansion and remodeling plans. Since retail construction is one of our specialties, this temporary slowdown has a direct impact on us. The good news is a majority of retailers are delaying their projects, as opposed to canceling them altogether. They are waiting to see if the holiday season will boost sales, allowing them to continue their expansion plans. We are all hopeful for signs of a recovery in the first quarter 2002.

Barry Shames, Shames Construction: As the economy has slowed, the quantity of projects has reduced. However, retailers are still building and it is the responsibility of the general contractor to establish relationships that will continue to produce opportunities. Our philosophy has always been quality over quantity, so although there are fewer opportunities, we continue to obtain our share of the projects. In a slowing economy, the better contractors will procure a larger percentage of the projects. Therefore you can us the term ‘survival of the fittest’ to describe the impact on the pool of general contractors involved in retail construction.

Stephen J. Romeo Jr., Scorpio Construction Inc.: It has been our experience that retail construction slows down considerably during the fourth quarter of the calendar year. Many of our clients are concentrating on profit from holiday sales and are busy planning the first quarter for 2002 construction of new stores, expansions, remodels and facelifts. The projection for job starts for the first quarter of 2002, looks very promising. There does not appear to be any sign of retail construction showing any impact from the slowing economy, but the state of the economy, sales from the Christmas season, among other factors, will determine any impact the slowing economy will have on retail construction for the remainder of 2002.

Rob Oldach, CSI Construction and Colorado Structures Inc.: For us, the slowing economy has created opportunities to increase the amount of work that we are best at, and to do it without stretching our resources. We also have taken some extra time to engage in process improvement throughout our organization.

SCW: How is the economic climate impacting your relationships with subcontractors?

Dana Walters: We are getting the best prices ever and using the same subs that have proven themselves in the past. We are developing fewer new subcontractor relationships. This creates more of a team atmosphere on projects.

Rob Oldach: We are finding that the subcontractors who know how to be profitable are getting more aggressive with pricing and stepping up their efforts at satisfying project needs. They are focusing on improvement and it helps us succeed.

Chris Picone: We have seen some subcontractors go out of business this year due to the weak economy. Subsequently, the pool of subcontractors has become smaller. As the subcontractors' stream of work decreases, pricing generally decreases. Remaining subcontractors offer more competitive pricing to try and win the available work.

Up until the first quarter of this year we had a robust market. Subcontractors did not have problems getting work. We were calling subcontractors to ask them to bid on the projects. As the economy began to slow down, this took a turn. Now we have subcontractors calling us wanting to bid for our projects.

Kent Moon: Though I feel we have always treated our subcontractors like a part of the Lakeview Construction team, the current economic climate has definitely brought ‘contractor and subcontractor’ closer together. I believe a partnership of the two is imperative when it comes to making projects run smoothly. I think everyone has felt the effects of the slowing economy, but we have prepared ourselves for a potential situation. Where other general contractors have held out on payment until they were paid from their customers, I am proud to say we have always paid our subs in a timely manner and will continue to do so.

Retailers need to be wary of working with companies that have reputations for not paying their subcontractors promptly. This can be an indication of monetary problems with a general contractor.

Mike Willingham, R.A.S. Builders Inc.: For the past several years, the continually increasing economy, coupled with a relatively static workforce of skilled trades people, has created an independent subcontractor group. This has made it difficult in many cases for general contractors to provide good competitive pricing for their clients, as subcontractors either declined bid requests or submitted inflated bid prices. Over the past few years, general contractors have had difficulty getting adequate coverage for their bids in many of the subtrades. With the slowdown in the economy, subcontractors have begun to seek out new work and to aggressively pursue bid opportunities. During recent months, it has not been unusual to see eight or 10 subcontractor bids in many of the major trade categories.

In some instances, this increased bid activity has already resulted in better prices for our clients. A tighter economy should also result in a thinning of the subcontractor ranks with many of the smaller start-up companies closing their doors. Instead of hurting those subtrades, this thinning should strengthen and improve the capabilities of the remaining subs. We see the result of these activities being a stronger, more qualified subcontractor workforce with more competitive project costs.

Barry Shames: We always try to maintain strong relationships with our subcontractors, and continue to do so during this current slowdown. Subcontractor pricing is lower, due to supply and demand, but it is imperative not to allow subcontractors to take on work below their costs. It is a delicate balancing act, that again tests the management capabilities of the general contractor. Generals with high caliber management personnel always pay attention to subcontractor relationships.

Stephen J. Romeo, Jr.: At Scorpio, we strive to not only establish and maintain excellent relationships with our clients, but our subcontractors as well. Economic factors generally do not affect ‘relationships’ with subcontractors; however, a slowing economy does tend to generate more competitive proposals from subcontractors when bidding projects. Recently we have noticed heavier-than-normal solicitation from subcontractors for our work. This enables us to broaden our subcontractor base and establish relationships with new subcontractors.

SCW: What affect will the slowing economy have on construction costs?

Chris Picone: Construction costs will decrease, due to supply and demand. This is the natural progression of a recession. By the second half of next year, we hope things will get closer to normal.

Carl Johnson: It should put a lid on cost due to slack demand, however we have not experienced a downturn.

Kent Moon: Prices will reflect the level of activity of subcontractors. While some regions may experience less new construction and therefore offer lower prices, there are always certain areas nationally with active construction that keep subcontractor prices at a high level. The lowest bidder is not always the cheapest way to go for the retailer. Any experienced retailer has lived through a time when a general contractor was unable to pay subs or worse yet, not able to stay in business and finish the project.

Gus Vratsinas, Vratsinas Construction Co.: Supply and demand in our economy is key. With the slowing down, generally, we have seen 3% to 5% cost reductions in the past three months. I stress generally because on complex, highly schedule-sensitive projects, reductions may not be as obvious because of the limited number of subcontractor/material men capable of doing these jobs. Conversely, on more simple projects, such as a big box, reductions would be greater. Many of the products we use in construction also are sensitive to the price of petroleum and energy, and we have seen great fluctuations in these prices in the past six months.

Barry Shames: I do not expect to see any major cost reduction, but more of a minor percentage and away from the rising costs we have seen over the last two years. The general contractor's percentage of the overall cost, is not significant enough to make a major difference, so the savings are coming mostly from the subcontractors that have had much success during the past economic expansion.

Stephen J. Romeo Jr.: Should the retail industry begin to scale back new store construction, subcontractors and material suppliers, along with general contractors, will most likely lower pricing to stay competitive. Conversely, if the economy slows down too drastically, prices could increase as contractors and suppliers will be forced to downsize their labor forces and increase their prices to stay in business.

Rob Oldach: Costs are coming down and have been for seven or eight months. We at CSI are typically constructing “proto” projects for national retailers, so there has always been pressure on costs — now we can meet or beat those costs using more qualified and more focused subcontractors.

SCW: How do you gain a clear understanding of client expectations before starting a project in today's market?

Carl Johnson: As a family-owned and operated business we strive to establish long-standing relationships with our clients. We are constantly in contact with our clients working together throughout the completion of a project to ensure their total satisfaction.

Chris Picone: Constant communication is essential to the success of every project. At Capitol, we take more of a team approach that involves the owner, architect, key professionals, subcontractors and our own team. We hold regular meetings with the key players to determine what they want and what their expectations are. We also look for ways to help save money through value engineering. In between these face-to-face meetings we rely on conference calls, e-mails and memos to make sure everyone is well informed and the questions or problems are resolved quickly.

Kent Moon: Before starting any project, clear communication is key. I feel the standard in any market today is providing quality workmanship, service and more service. We currently work for demanding clients. Our experience is that by preparing for the most demanding client you will be prepared to please all of your clients.

Robert Dyer, The Lathrop Co.: We are a company that is segmented into different market sectors. This structure has allowed us to develop and maintain expertise in different areas. This also allows us the opportunity to stay abreast of trends, new concepts and owner and developer methodology.

We try to provide our pre-construction services in the very early stages of the project in order to gain a complete insight into the project and deliver the maximum input to the owner. We attend as many meetings as allowed with the owner, architect and other consultants to obtain an understanding of any special requirements for the project.

We provide personnel that have experience in the particular building type and development who also can bring special knowledge and ideas to the owner. Beyond that our market segment managers have many years of experience in their respective segments, which they have gained on either or both sides of the table. The market segment managers are the project executives for their projects so their expertise adds to the clear expectations.

Barry Shames: We try to ask as many questions as possible and look under all the rocks during the pre-construction phase of the project. Developing a rapport during the bid or pricing phase will allow for a greater success for a contractor to meet the client's expectations. A strong management team for a general contractor will already have the proper systems in place to insure that the client's expectations are known and met.

Stephen J. Romeo Jr.: We have always taken pride in our relationships with our clients. We strive to work with them, their vendors, architects and construction staff as if we were a team. Knowing our clients expectations is one of our top priorities. Taking and making the time to communicate with the client helps us learn their expectations and is essential for establishing healthy and strong relationships. With experience and Scorpio's ‘make it happen’ attitude, we strive to understand what we need to do for each and every one of our clients and their expectations, before, during and after every new project.

Rob Oldach: Our preconstruction services are the key for us. We identify the most important thing to the retailers — schedule, making sure that the timing for possession and opening is held regardless of any project circumstances, but also we are seeing more urban projects where neighborhood groups, development plan approval conditions, and access issues have to be given day to day attention by the contractor.